A Quarter To Remember
The analogue of the 60-month run from 1932 to 1937 and the 60-month analogue of 1982 to 1987 is at hand.
And I'm, I am feeling a little peculiar.
-What's Going On (4 Non Blondes)
What a quarter! The scorching volatility of the summer of '07.
The greatest volatility in 60 years. How so? As measured by the DJIAaaaaaah!, the index had been rising or declining 100 to 200 points approximately every three days since the July 20 sell signal.
Only since last week, following the lack of followthrough on the heels of the Bernanke Put-Put did stock market choppiness contract from the summer extremes. Oh, it was still choppy as one day in most stocks bore little relation to the next, but the range of the choppiness recoiled.
Despite the hellzapoppin' extremes across a wide spectrum of financial markets, such as equities, oil, gold and the dollar, to mention a few, stocks actually exited this quarter of hysteria relatively calm and unchanged thanks to the injection of Librium courtesy of Dr. Bernanke and the team at Green Anatomy. At the close of the second quarter, the S&P stood at 1503.35. Friday saw the index settle the quarter at 1526.75. Can you say a lot of sound and fury, most certainly not signifying nothing?
So what's going on? Search me. Of course it's typically easier and wiser to trade the "what" rather than parse the why and wherefore. Speculation is observation, pure and experiential. Thinking isn't necessary and often just gets in the way.
I think most of us as traders would say this was a fascinating show to watch if our own money weren't on the line everyday. But this quarter's extremes begged for explanations. Build it and the pundits jump on it: Explanations ran the gamut, including the notion of the deflationary collapse of a great bubble, and a successful reinflation to hyperinflation, from a brave new bull market towards 15,000 DJIA before the end of the year to a crash in October.
Confusion reigns and frustration is as thick as the spread on a thin Nasdaq stock, frustrating many of the best and brightest observers of financial markets. Connecting the most seemingly accurate of dots with the apparently straightest of lines has not led to ringing the cash register in the quarter for many players of late.
The new math boyz of the crazy quant quilts got killed after July, while those expecting September to follow the seasonal historical weakness, especially given Mr. Market's foul mood prior to September, felt like they met murderer's row when the FOMC slashed and burned rates.
It's an old market axiom that the market turns on a dime while most trades cannot. But given the collapse and seizure in the credit markets, a mere 20-day debacle from the July 19 high to the August 16 reversal seems tame by any historical precedents. That is, I suppose, unless you've got the Spice Girls running monetary policy.
The 28-day calendar decline was just half of the "normal" 55-day panic or culmination cycle typically seen after blow offs unwind. And this blow off was punctured by an ornery set of fundamentals stirring up a perfect storm. So there was every reason to expect September would see a perfect financial storm. Perhaps that is just the point: the Fed saw it too and panicked. Hey, put a few Harvard Alums in a room and even they can do the math and count to 55 while listening to Van Halen.
Even the most dyed in the wool left-brain fundamentalists could see the writing on the wall with their right brains: The historical parallels to some of the biggest unravelings in history loomed large in their legends. Enter Bazooka Ben and Hanky Panky, the Architects of Ease, or as they're know in the corridors of Wall Street, Little Mister Sunshines.
Those married to a thesis and on honeymoon with their opinions last quarter better have had some equity pre-nups lest the counter the aforementioned un-rung cash register was propped on is confiscated. Nevermind the unrealized gains.
So, what's going on? Was one of the greatest graceful exits in market history carved out or is the market poised to do a repeat of the run after the Spring Break? Is it going to be Revenge of the Nerds or Nightmare on Elm Street in October?
After what may prove to be one of the greatest short squeezes in history and the Mother of all Dead Cat Bounces, the sheep may be cool, calm and collected just as the bigger cats, the Cheetahs of Reversion, are coiled.
The Hens may feel like they are sitting pretty, but the Foxes may be guarding the hen house.
From where I sit, we should see by the end of this week at the latest whether the goose has laid a golden egg or it's Humpty Dumpty time for Hoofy.
Why? A look at the two charts below from 1932 to 1937 and from 2002 to 2007 bear an uncanny similarity. I suspect most of the market participants at the time at the end of the summer of '37 thought the worst was behind as well. A few years prior to abyss of 1932, stocks were jitterbugging to the stratosphere. A few years before the depths of 2002, stocks were rocking and rolling to a new paradigm of a permanent plateau of prosperity.
Click here to enlarge.
A) 3Q '34 begins persistent advance (B). Note the sharp break in 1937 and the test at point (C).
Click here to enlarge.
3Q '04 ends a consolidation which begins a persistent advance. Is the S&P at a test at point (C) analogous to the test at point (C) in 1937?
The analogue of the 60-month run from 1932 to 1937 and the 60-month analogue of 1982 to 1987 is at hand. In addition, as Peter Eliades points out, "the average decline between October 3 and November 8 of years ending in 7 since 1897 is 14.29% on a closing basis."
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